Watching lithium stocks this year, I’ve seen a familiar growth pattern. First, investors latched on to the idea that lithium is going to be in big demand for electric vehicles. And plenty of them piled in, pushing share prices skywards.
Then some investors took a step back, and started thinking a bit more seriously about the valuations of these shares. The enthusiasm subsided. Share prices fell back. But if a growth sector really does have potential, we often eventually see more sustainable gains setting in.
Looking at the way some UK lithium share prices have started to pick up again, I can’t help wondering if that’s happening right now. After a volatile spell, are we heading for serious growth?
Atlantic Lithium is a good example of the phenomenon. It’s share price climbed as high as 68p in April. Approaching the end of July, it had lost more than half that value and stood at just 30p. Since then, we’ve had a bit of a resurgence. And it’s gained 30% since that recent low, to 39p.
No profit yet
One of the difficulties is that Atlantic Lithium is not profitable. And that means the most common valuation metrics, which are based on profit, can’t apply.
All investors can really go on is news of progress at its Ewooya lithium project in Ghana. The company has upgraded its resource estimates, and is working on drilling plans and feasibility studies.
I think that’s promising, but I can’t quantify it financially. I have no idea how much it will cost for the company to get to profit.
Zinnwald Lithium has also been a favourite with investors. The shares peaked in August 2021, but have fallen in 2022. And despite a modest recovery in recent weeks, the price is still down 67% over the past 12 months. It’s a very small company, this one, with a market cap of just £27m.
Another new rise
European Metals Holdings is another interesting one. Its share price is now down 45% over the past 12 months, at 45.5p. At its 52-week peak, it even reached as high as 110p.
Like Atlantic Lithium, the share price has also been gaining since its low point, in June. But unlike Atlantic, European Metals Holdings is profitable.
The company is only small, with a market cap of £84m. But its Cinovec project in the Czech Republic seems well positioned to serve the motor manufacturing markets of Germany and Eastern Europe.
Asset valuation?
We’re looking at a trailing price-to-earnings (P/E) ratio of around 23, which might be very good value. The trouble is, the stock’s valuation is also based on hopes for the size of its lithium deposits. And that, right now, is a big unknown. It could be potentially huge. But there’s no guarantee.
So are we looking forward to a new surge in the prices of lithium stocks? Well, I’m convinced the lithium market will expand considerably in the coming decades. But I don’t know if recent gains will turn into a sustainable new surge just yet. We’ll have to wait and see.
